7th CRO Assembly Conference Report

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Conference Report

16–17 November 2011Swiss Re Centre for Global DialogueRüschlikon, Switzerland

7th Chief Risk Officer AssemblyThe path to future growthFocusing on new risk horizons

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Editorial

The main themes at the 7th Chief Risk Officer Assembly were emerging risks, emerging markets, and regulation. The various keynote speeches, breakout sessions and panel discussions all addressed these broad themes. As a grave source of risk, the sovereign debt crisis was constantly in the background when not actually the main subject through-out the proceedings. Key areas of emerging risk were considered to be increased complexity, limitations of existing financial machinery, increased governmental involve-ment with markets, and a potential breakdown of the social contract as a result of the financial crisis. Solvency II and interactions between banking and insurance regulation were considered in detail. While acknowledging the need for appropriate regulation, some thought that regulatory activity in its current form constituted the most serious threat to the re/insurance sector. The longevity challenge and the growing im-portance of geopolitical risk also figured prominently in the discussions.

There were no illusions about the barriers that companies might face in trying to gain a foothold in emerging markets: regulatory hurdles and bureaucracy, high corporate tax rates, the challenge of unfamiliar cultures, lack of data, lack of insurance professionals, and the need to think in completely different ways by comparison with the traditional, advanced markets. But there was also enthusiasm for the opportunities offered by the emerging markets’ low insurance penetration and its steeply rising numbers of potential clients as well as the tremendous scope for creative and unconventional solutions.

David Cole Patrick M. LiedtkeMember of the Executive Committee Managing DirectorChief Risk Officer, Swiss Re The Geneva Association

Scan the QR code with your smart phone and watch the video: “Risk management: facing challenges, finding solutions” with David Cole, CRO Swiss Re, and Patrick Liedtke, Managing Director, The Geneva Association

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Table of contents

Session 1: Emerging risksOff the beaten path – anticipating and insuring new risks 5Emerging risks in a globalised economy 7Global longevity trends and their potential social and economic implications 9Understanding geopolitical risk 11Breakout sessions 12

Session 2: Emerging marketsSignposts for risk management in growth markets 19New risk landscape in emerging markets 21Growth strategies in emerging markets 23Breakout sessions 24Panel discussion 29

Session 3: Regulatory frameworks in a globalised economyMapping the new regulatory landscape 33Risks and opportunities in the global regulatory landscape 35Outlook on the European regulatory landscape 37The interaction of banking and insurance regulation 39The impact of changing accounting standards on the performance of the insurance sector 41Panel discussion 42

Session 4: Challenges along the path to future growthStaying on course 45Breakout sessions 46

Impressions 49

About the event 54

Organisers 55

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Session 1: Emerging risks

Off the beaten path – anticipating and insuring new risks




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“Rapidly rising complexity and breakdowns in the machinery of finance are among the common factors in emerging risks.”

Bennett Golub

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Emerging risks in a globalised economy

Bennett Golub, Chief Risk Officer, BlackRock

The growing complexity of financial enterprises has raised their vulnerability to cata-strophic failure, including fraud, operational errors or business continuity disruptions. The scale and complexity of financial activity also increases the likelihood of costly operational errors. As complexity rises, the need for more effective operational risk programmes becomes more acute.

Poorly crafted regulations can result in inefficiency, and companies understandably complain about the burden of regulatory compliance. Historically, however, unre-strained market forces have been unable to maintain long-term stability. In the wake of the 2008 credit crisis, the financial system could not continue to exist without external support, which came from national governments. The sovereign debt crisis in Europe again demonstrates the need for a lender of last resort. Given the astronomic cost of financial market instability (bail-outs, loss of GDP, unemployment), it is reasonable to establish regulatory frameworks. However, the profit-seeking participants in a market economy always move faster than the regulatory regime and will come up with ways of exploiting its gaps. The big risk is not too much regulation, but rather too little, or ineffectual regulation. More resilient institutional design, adoption of stability-oriented financial policies, and more prudence from investors and market players would mitigate the risk. Slowing down market processes, such as the introduction and distribution of new products, would promote market stability.

Figure 1: Common factors in emerging risks

Rapidly rising complexity Breakdowns in the machinery of finance The implications of the limited ability of regulatory intervention in markets and

the financial system Increasing strains in the political economy of developed economies

Source: Bennett Golub, BlackRock

The social contract is currently threatened because people – losing out from the changes incurred by the financial crisis – may reject the economic system and cease to voluntarily comply with it. One consequence could be a heightened credit risk due to unwillingness to pay, as current examples show.

Four key areas of emerging risk were identified: the implications of increased complexity the limitations of the existing financial machinery the implications of increased governmental involvement with markets a potential breakdown of the social contract

Scan the QR code with your smart phone and watch the video: “Emerging risk and the social contract“ with Bennett Golub, CRO, BlackRock

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“In the West, the longevity challenge means not only a falling support ratio, but also a shrinking labour supply.”

George Magnus

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Global longevity trends and their potential social and economic implications

George Magnus, Senior Economic Adviser, UBS

Rising life expectancy and the rapid ageing of western and certain other populations raise grave concerns about the prospects for retirement funding and old-age security. Rising life expectancy and a longer working life mean that people have to retain expo-sure to risk assets for longer than hitherto. This creates a need for asset management products which maintain exposure to risk assets longer but exercise control regarding volatility. The demographics of the developed economies intensifies the tendency to low interest rates and weaker returns. A huge change in age structure alters the supply of and demand for capital and labour, so that in the West, more of the return will go to labour and less to capital.

The population ageing process will occur much faster in the developing countries than it did in the West, but the emerging economies will face the longevity challenge with levels of income and social security far below those of the developed countries. For emerging economies with the “economic dividend” of rising numbers of working-age citizens, it may be difficult to exploit the advantage if unemployment is already high.

Figure 2: Longevity conclusions

Anaemic growth, more regulation, weaker asset return Governments, companies need to build new coping mechanisms Absent new baby boom, higher mortality rates for older people, we will have to look

to technology and productivity too Meantime, focus on financial coping Demand for new products to help fill gaps, including draw down and insurance Also important in emerging markets, ie China and India – undeveloped capital

markets, thin veneer of insurance and financial protection if any

Source: George Magnus, UBS

In the West, the longevity challenge means not only a falling support ratio, but also a shrinking labour supply, which is making it increasingly difficult for companies to recruit and retain staff. There is strong economic logic for employing more women and for allowing and encouraging older employees to continue working longer.

Scan the QR code with your smart phone and watch the video: “Addressing rising longevity “with George Magnus, Senior Economic Adviser, UBS

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“The world economy is moving towards the emerging markets, which harbor risks such as corruption and political unpredictability.”

Sir John Scarlett

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Understanding geopolitical risk

Sir John Scarlett, former head of MI6 (British intelligence service)

The past two years have been a period of extraordinary geopolitical transformation. Events in the Middle East and North Africa constitute the most obvious example. The Arab upheaval is comparable in scale to events in Eastern Europe and the former USSR 20 years ago, but it does not have an equal sense of direction. Its origins lie partly in dissatisfaction with high commodity prices, but also in resentment at social inequality and corruption. It is not really a “democratic awakening”, but rather a work in progress.

The past two years have also seen a major change in the role of China as an economic and political power. China will have the world’s largest economy overall by 2019, and the dynamism of the emerging markets is wholly underpinned by what is happening there. In line with historical examples, China’s economic power will translate into military and diplomatic power.

Despite its economic difficulties, the USA remains the only superpower. Much of its apparent drawdown is actually repositioning, especially considering that it will probably be self-sufficient in energy in the next five years. Europe is currently labouring under financial volatility, low or no growth and confused governance arrangements between nation states and the EU.

The world economy is moving towards the emerging markets, where growth has been vigorous but which harbour risks. In certain emerging market countries, corruption is rife in almost all areas of daily life. For Western companies and investors, the problem can be compounded by emerging market mercantilism.

Political unpredictability constitutes a further hazard of doing business in emerging markets. Where contacts in high places are a prerequisite for success, it is vital not to end up on the losing side if power changes hands. Also, openly being friends with the “baddies” can entail serious reputational risk.

The watchword for companies approaching emerging markets is “think politically” and assess risks carefully.

Scan the QR code with your smart phone and watch the video: “Geopolitical risk in changing times” with Sir John Scarlett, former head of MI6

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Breakout sessions

Climate risk/Natural disaster trends David Bresch, Head of Sustainability and Political Risk Management, Swiss Re

The increase in weather-related natural catastrophes over the last few years has incurred huge costs. The gap between insured and economic losses is widening.

Climate change is a fact. Even if emissions stopped today, the climate would continue to change. Therefore, we need to adapt in order to manage the unavoidable. But we also need to reduce greenhouse gas emissions to avoid the unmanageable.

Climate adaptation in threatened areas is an urgent priority for decision-makers. Such decision-makers ask: What is the potential climate-related loss to our economies and societies over the coming decades? How much of that loss can we avert, with what measures? What investment will be required to fund those measures – and will the benefits of that investment outweigh the costs?

The Economics of Climate Adaptation (ECA) methodology, co-developed by Swiss Re, provides decision-makers with a fact base to answer these questions in a systematic way. It enables them to understand the impact of climate change on their economies – and identify actions to minimise that impact at the lowest cost to society. It therefore allows decision-makers to integrate adaptation with economic development and sustainable growth. In essence, we provide a methodology to pro-actively manage total climate risk, which means:

1) Assess today’s climate risk2) Chart out the economic development paths that put greater population and

assets at risk3) Consider the additional risks presented by climate change

In the 17 studies carried out so far1, we learn that the key drivers in many cases are today’s climate risk and economic development. The prioritisation of the adaptation measures is not strongly dependent on the chosen climate change scenario. This presents a strong case for immediate action; it is cheaper to start adapting now than to sit and wait.

1 www.swissre.com/rethinking/climate/Strengthening_climate_resilience.html

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Cyber risks Myriam Dunn Cavelty, Head of the New Risk Research Unit, Center for Security Studies, Swiss Federal Institute of Technology, Zürich

Cyber risk2 is an operational risk, not clearly delineated; there are cyber aspects to other categories of risk.

Cyber vandalism can be seriously damaging and includes activities like website defacement.

Cyber crime, including fraud and theft, can have very costly consequences for the victims.

Cyber espionage occurs at the corporate and government levels and often is undetected.

Cyber terror is a potentially highly destructive weapon that could take the form of attacks on critical infrastructures like power grids or healthcare systems.

Cyber sabotage has already taken place (Stuxnet). The borderline between this and cyber terrorism may be blurred.

Cyber war constitutes the ultimate cyber risk. Various governments and militaries have apparently done much work in this field.

As connectivity increases (smart grids, houses, cars), vulnerability rises. Cyber risk has to be managed through information, policy and technology. Awareness is high, especially of the importance of business continuity management

and resilient systems.

2 http://prezi.com/z_xi_ly0pdnn/cyber-risk/

Scan the QR code with your smart phone and watch the video: “Cybersecurity: an international effort” with Myriam Cavelty Dunn, Head of New Risk Research, Center for Security studies, ETH

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Managing accumulation in an increasingly complex world Jo Oechslin, Chief Risk Officer, Munich Re

Increasing interconnectedness is leading to increasing complexity of risk. A certain event can trigger multiple insured losses, but can also trigger further events leading to additional insured losses. Insurers will be reluctant to offer cover in cases where they feel they cannot manage the accumulation of such complex scenarios.

Contingent business interruption is an example of a problematic risk, because we do not always understand the true triggers of CBI cover. Also supply chains may not be transparent enough and we may be unaware of what the actual loss would be.

To understand interconnectedness better, Munich Re is undertaking an effort to sys-tematically gather dependencies and integrating them in a database system. Referred to as CARE (Complex Accumulation Risk Explorer), it takes into account the four basic areas of society and politics, environment and nature, economics, and technology. The aim is to identify complex loss scenarios by using interdisciplinary expert knowledge. CARE will be used for identifying and structuring complex accumulation risks.

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Unintended consequences of regulatory changes Philipp Keller, Head of Financial Risk Management, Deloitte

The credit crisis and crises in the past have shown that regulation can render insurers vulnerable to risk or can exacerbate existing risk.

Examples include uneconomic capital charges for certain asset classes, reliance on external ratings or compromised valuation standards.

When regulation designates a bank as systemically important, so that it receives implicit or explicit government guarantees, the result may be a lower cost of capital, a higher rating and a competitive advantage for the bank in question.

Helping banks to restore their balance sheets by having a low-interest rate policy leads to a misallocation of capital. It means that life insurers and pension funds are increasingly financially strained, and it puts the insurance industry at a competitive disadvantage.

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CRO Forum Emerging Risks Initiative Michael Bruch, Risk Consultant, AllianzMarkus Aichinger, Senior Risk Manager, Allianz

The CRO Emerging Risks Initiative was launched in 2005 to raise awareness of major emerging risks for society and the re/insurance industry.

The risk of large-scale power-cuts is generally underestimated. The likelihood of long-lasting, supraregional power outages with high economic losses is rising.

The risk is heightened by insufficient investment in ageing power infrastructures, a lack of preparedness, the interconnectedness of electricity grids and increasing volatility of energy production.

The economic loss probability is potentiated by the interconnectedness of critical infra-structures (eg energy supply, transport, telecommunication; water supply, financial services, hospitals) and their dependency on information communication technology.

Natural events like snowstorms and earthquakes can cause blackouts. But the worst-case power-cut scenarios are those due to space weather (solar storms) and terrorism (cyber or “conventional”).

Traditionally, insurance coverage for blackout losses require a direct physical loss or damage as trigger for a business interruption. However, blackouts may lead to supply chain interruption without any physical loss. It presents a significant challenge, how-ever, to handle those intangible risks while also offering an opportunity to invest in the development of tailored insurance products.

Governments, the power industry, consumers and insurers should together address and manage the risks associated with power outages.

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Session 2: Emerging markets

Signposts for risk management in growth markets




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“The biggest risk in the emerging markets is a Chinese investment bust, which could occur in the next couple of years.”

Nouriel Roubini

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New risk landscape in emerging markets

Nouriel Roubini, Professor, New York University, and Chairman, Roubini Global Economics

Many risks in the global economy originate in traditional advanced economies, which in some ways now resemble emerging markets themselves. A decade ago, the borrowers and debtors were the emerging markets of Latin America, Asia and Eastern Europe. But they now have substantial reserves as buffers against liquidity shock and have become lenders themselves, while the US and European countries have become the borrowers. There has been a shift in global economic power from west to east and north to south, and the emerging markets’ share of global GDP, already close to 50%, is rising.

With regard to possible decoupling between the emerging markets and the advanced economies, the major downside risk currently emanates from the periphery of the Eurozone (with the damage now spreading to the core) and to a lesser extent from the US. A disorderly default or disorderly exit by Eurozone countries could be a much bigger shock than the collapse of Lehmann Brothers. It would drag both advanced economies and emerging markets into recession and create a global financial crisis. At times of high risk aversion, correction in the emerging markets has been even greater than in the advanced economies. So financial recoupling is almost instantaneous, and when risk is on, the reverse applies.

For countries like Brazil, Turkey and India, with high domestic consumption, the growth prospects are good. China’s rapid growth depended largely on the US’s willingness to buy goods there and incur massive debts. The fact that this can no longer be so, com-bined with China’s low level of internal demand, means that the country’s recent growth rates are not sustainable. China’s high level of fixed investment of about 50% of GDP will also have deleterious consequences. The reforms needed to induce less saving and more spending there will take ten to twenty years. A Chinese investment bust could occur in the next couple of years and would make for a hard landing. This constitutes the biggest risk in the EMs. Each of the BRICs will have to carry out macro-economic, financial and structural reforms to maintain high levels of growth.

The increasing inequality of income and wealth, the economic insecurity now affecting the advanced economies, the high levels of unemployment especially in the emerging markets and the lack of prospects among young people will have a backlash. Already apparent in the Arab upheaval and the Occupy movement, these collateral risk effects of globalisation have to be addressed.

Scan the QR code with your smart phone and watch the video: “Current risks in the emerging market land-scape” with Nouriel Roubini, Professor, New York University

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“Companies wishing to gain access to the Brazilian insurance market face high barriers and therefore must have a highly differentiated value proposition.”

Luis Maurette

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Growth strategies in emerging markets

Luis Maurette, Chief Executive Officer, Latin America, Willis

Latin America comprises 20 countries with a combined population of 562 million. Its GDP is equal to China’s, and market capital exceeds that of Russia and Eastern Europe combined. Growth has been steady, the main engines being Brazil and Mexico. A hun-dred companies spread over eight countries operate internationally, having a strong presence in oil and gas, mining and metals, agribusiness and food and beverages.

Insurance plays a far less important role than in the developed countries. Brazil is the world’s eighth largest economy, but it ranks 33rd in terms of insurance penetration (3.1%). Brazil’s insurance market is nevertheless worth USD 75 billion and has been growing at an annual rate of almost 26% since 2002.

The highly competitive Brazilian market is made up of a few very strong companies with large distribution networks. Five banks, together reaching 100 to 120 million customers, basically control the business. On the commercial/industrial side, there is a large number of mid-market firms. The gaps in this market represent a real opportunity for insurers, though the competition should not be underestimated. A company wishing to gain initial access to the classical market, however, would face high barriers and would need a unique model with a highly differentiated value proposition. Efficient distribu-tion is a critical factor. Acquiring a local company would be a theoretical possibility for a new entrant, but it would be extremely expensive. Local regulations are constantly changing; tax on profit is high and the fiscal system is complicated.

Technologically, the Brazilian banking industry is highly sophisticated, and insurance is following the same route. Efficiently covering the huge national territory is one reason for deploying powerful technology. With regard to personal lines, all the brokers and agents are linked online with their carriers, and they expect the companies to have technology optimally suited to achieving growth and high service quality.

Figure 3: Strategies for entering emerging markets

Have a clear understanding of the market forces, culture and dynamics Build a mid-term strategy to guide trade-offs and investments Review consistently your strategy in light of new market events Invest in operational efficiency and automation Surround yourself with a strong team with a keen interest in execution

Source: Luis Maurette, Willis, Latin America

The demand for talented professionals far exceeds supply. Foreign professionals are at an initial disadvantage by not being familiar with the culture and market. In the popula-tion at large, there is a great lack of understanding of the need for insurance, and this even extends to SMEs. Any organisations coming in and addressing this problem could really add value. Market prospects are rising as the poor increase their earning power: in the past year, 40 million previously unbanked potential clients entered the market.

Scan the QR code with your smart phone and watch the video: “Keys to success in the Brazilian market” with Luis Maurette, CEO Latin America, Willis

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Breakout sessions

Anticipating market developments in China Clarence Wong, Chief Economist Asia, Swiss Re

Already the world’s sixth largest insurance market, China may become the second largest in the next ten years.

The China Insurance Regulation Commission (CIRC) foresees a doubling of premiums to CNY3 trillion by 2015, with a penetration rate of 5%. The focus will be on agriculture, liability, natural catastrophes, pensions and health. But there are signs that China’s rapid economic growth may slow down and the risk of economic dislocation has also increased.

Foreign companies have so far very small market shares in China. Their operations are hampered by unclear or inconsistently interpreted regulations, difficulties in applying additional provincial licences and intellectual property rights protection etc. For foreign firms wishing to go into the life insurance field, only joints ventures are permitted. The choice of partner is crucial.

Regulatory risk is considered to be quite high. The revision of bancassurance regulation in 2010 has resulted in rare negative new business growth of the country’s life insurance market.

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Microinsurance — challenges and opportunities Michael Anthony, Head of Microinsurance and Food Security, AllianzMichael Roth, Senior Advisor, Financial Systems Development, GIZ

Microinsurance offers risk protection to low-income, moderately poor people in developing and emerging countries.

It brings social benefits by expanding financial inclusion and safeguarding hard-won earnings. It benefits business by driving innovation and cost efficiency, providing a branding opportunity and generating reasonable profits.

Microinsurance is itself vulnerable to risks: (1) reputational: the press is quick to ex-pose bad sales practices; (2) legal: politicians have been known to hijack the instru-ment and introduce laws around it for their own purposes; (3) operational: a lack of infrastructure and high volumes increase operational volatility; (4) data: the lack of data makes pricing difficult.

Allianz/GIZ apply four strategic principles to their microinsurance business: (1) fair pricing for the insured and the insurers; (2) easy access for the clients through good distribution channels; (3) transparency to ensure that clients understand what they are buying and what it costs; and (4) a need-driven product portfolio.

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Demographic challenges for Japanese insurers and implications for the region Makoto Okubo, General Manager, International Affairs, Planning and Research, Nippon Life Insurance Company

The Japanese life insurance market is the second largest in the world in terms of premium volume (USA is the largest). The Japanese population is ageing rapidly; the country has a higher proportion of 65-year-olds in its population than any other.

While much attention is currently focused on interest rates, stock prices, currency rates, natural catastrophes and systemic risks, the most important long-term issue for the life insurance industry is probably the shifting demographics.

The Japanese social security and healthcare systems are facing difficulties and the likelihood of reform. This may open the way for an expanding role for the insurance companies.

Lifestyle is changing. People tend to marry late or remain unmarried, and the number of childless households is increasing. The affluent baby-boomers are now retiring and are an attractive target group for life insurance companies. All these factors are leading to a shift in insurance needs towards medical and post-retirement coverage.

In its changing role, the life insurance industry will face accounting and regulatory chal-lenges. Under the current proposal, there could be significant volatility for long-term products, and risk could be increasingly transferred to customers or there could be a negative impact on the economy. The impact may vary by jurisdiction due to the differ-ent business models or circumstances. The international standards should be set in such a way that insurers can support society for the long term.

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Managing and insuring political risk in emerging markets Benjamin Baker, Senior Executive, Underwriting, Lloyd’s

Political risk arises when government action is directed against assets or impacts trade contracts. Terrorism and insurrection are also classified as political risk.

Political risks in emerging markets have to be assessed individually and independently of any definitions of what emerging markets are.

Underwriters must consider the relevant industry and sector, product, buyer, tenor of contract, terms of payment, experience, recovery prospects and subrogation rights, and they should bring in a good political risk broker.

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New insurance products in Latin America Rolf Hüppi, Founder and Executive Chairman, paraLife

Insurance penetration in Latin America is low: 1.1% GDP for life and 1.52% GDP for non-life. In the lower market segments especially, there is a lack of understanding of what insurance is.

Strong industrial growth and international expansion of economies call for new solutions. Natural catastrophe exposure creates opportunities for non-traditional approaches.

There are many potential new customers in the low-income segments, many of them unbanked until recently. For this group, including micro-entrepreneurs, insurers should think beyond conventional systems and provide solutions rather than products. Oppor-tunities for innovative microinsurance are open in health, life and microcredit protection in relation to natural catastrophes.

In the middle market, convenience and services are becoming an increasingly impor-tant part of the product offering. Parametric cover (with proof of claims) is expected to grow, mainly in the agro sector. Finally, regulation should be adapted to specific market segment needs.

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Panel discussion

Emerging markets: market overview, opportunities and risks Moderator:Reto Schnarwiler, Head, Americas and EMEA, Global Partnerships, Swiss Re

Panellists:David Cole, Chief Risk Officer, Swiss ReRolf Hüppi, Founder and Executive Chairman, paraLifeClarence Wong, Chief Economist Asia, Swiss ReJesus Zuniga, Chief Investment and Risk Officer, Grupo Nacional Provincial SAB

In terms of growth, the emerging markets have consistently outperformed the devel-oped markets over the last few years, with emerging Asia clearly in front. Despite the growth record, decoupling is not happening, or not fully. Having learned from previous crises, Latin America and Asia have reduced external debt. However, in Eastern Europe, external debt in relation to GDP has increased. Since the third quarter of this year, economic growth in Asia has slowed, inflation has peaked, and against a background of decreasing capital inflows, there has been some reduction of interest rates and depreciation of currencies.

Life insurance in the emerging markets has grown vigorously, but with some volatility over the last ten years. Regulation can have considerable impact on the business, as the tightening of bancassurance rules in China in late 2010 has shown. Regulation across emerging markets generally is converging, and more risk-sensitive solvency regimes are being introduced. The emerging market non-life sector also outperformed the devel-oped markets over the past decade.

Insurance penetration is increasing but remains low. Some emerging markets still limit access for foreign companies. Government ownership or involvement in insurance is considerable but gradually receding.

Rolf Hüppi said there are three main reasons for the attractiveness of emerging mar-kets: the low insurance penetration means that there are significant growth opportunities; many people are gaining purchasing power and becoming potential clients; the opportunity to innovate exists in markets that are still product-based rather than

solution-based.

David Cole added that diversification is a good reason to go into emerging markets, and governments might also be potential clients. He thinks it is important to offer services to companies seeking new growth opportunities in the emerging markets.

Jesus Zuniga said that his company, with its high-income bracket bias, is considering expanding into the medium-income market, where growth potential is high. Hüppi commented that activity across emerging markets is made difficult by their huge differ-ences.

Clarence Wong said there are not only different challenges in the Asian countries, but also different opportunities. On the risk side, regulatory changes are likely to cause problems, so companies should try to help shape the regulatory landscape. Zuniga stressed the importance of good underwriting policy as a risk mitigant. The critical factor for Hüppi is to understand the market segments, adapt solutions to them and ensure that operational capacity can respond. For Cole, it is vital to have a long-term view and understand that there will be no easy, short-term wins. The crucial supporting factor is talent, and to foster it, there has to be investment in people. Hüppi stressed that different insurance professionals are needed for the different market segments.

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Session 3: Regulatory frameworks in a globalised economy

Mapping the new regulatory landscape




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“Regulators must strike the right balance between micro-prudential and macro-produential surveillance.”

Stefan Lippe

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Risks and opportunities in the global regulatory landscape

Stefan Lippe, Chief Executive Officer, Swiss Re

According to Stefan Lippe, the fast pace of regulation and reform is alarming. The in-dustry has not had time to study the implications of the regulatory activity, and the diffi-culties are exacerbated by the volatile macro-economic situation. No cumulative impact study has been done on the overall reforms, and only recently has a start been made on considering the cross-sectoral implications. The re/insurance industry has repeatedly demonstrated its capacity to act as an economic buffer and source of stability in global stress events. The regulatory framework should boost the resilience of the insurance sector rather than jeopardise it.

Referring to the bodies responsible for macro-surveillance, Stefan Lippe detailed three main challenges: serious risk of duplication and confusion of roles and responsibilities; institutions dominated by central bankers, developing measures and recommenda-

tions based on banking approaches and experiences the challenge for the insurance industry to be heard and understood.

There is a pressing need for regulators to strike the right balance between micro-pru-dential and macro-prudential surveillance. The two should not be mingled. Stefan Lippe deplores the tendency of the institutions to step into the role of group supervisor. “Regulatory incentives can be drawn from economic steering and enterprise steering practices, but regulators should not aim to act as risk managers and steer the busi-ness.” He introduced Swiss Re’s Enterprise Steering Platform, at present a tool limited to top management, which enables the users to obtain apposite information fast.

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“The European regulatory agenda and Solvency II have been strongly influenced by the financial crisis. There is a move towards a single EU rulebook for financial services.”

Karel van Hulle

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Outlook on the European regulatory landscape

Karel van Hulle, Head of Unit Insurance and Pensions, European Commission

The European regulatory agenda and the “new look” of Solvency II are strongly influ-enced by the financial crisis. There is a move towards a single EU rulebook for financial services, which should help to steer both regulators and industry towards a better regulatory environment. Actions taken in the wake of the crisis of 2008 include: Global measures for addressing systemic risk in the financial system

(including macro-prudential supervision) Close cooperation of the EU with the G20, FSB, and Joint Forum ECOFIN action plan at EU level Improvements to EU supervisory architecture

Specific initiatives on insurance include: New solvency framework for insurers and reinsurers (Solvency II) Review of the insurance mediation directive (IMD) Review of the occupational pension funds directive (IORP) Introduction of an insurance guarantee scheme

There is some confusion about the solvency capital requirement (SCR) and minimal capital requirement (MCR). Breach of SCR will be regarded only as an early warning signal, and there is room between the two requirements for companies to cooperate with the supervisors and get back on track. Capital alone does not guarantee a good solvency regime without good governance. Own risk and solvency assessment (ORSA) is intended to deter companies from taking undue risks without an adequate capital base. The coming common European templates for supervisory reports will require insurers to disclose more than ever before. The supervisors need the right data to make Solvency II function. They will continue to require market-consistent valuation data, which they need for comparability. Implementation measures for Solvency II will be adopted by Commission-delegated act in 2012.

Van Hulle concluded with the following points: There is an urgent need for a globally accepted solvency regime for re/insurers; Solvency II will have a profound impact in the EU and will inspire reforms elsewhere

in the world; Risk management and governance are key issues; There will be a strong focus on the protection of consumers; And…. Rome was not built in a day.

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“Enhanced supervision is critical for both the banking and insurance sectors. There has to be a good dialogue between supervisors and firms.”

Paul Wright

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The interaction of banking and insurance regulation

Paul Wright, Senior Director, Institute of International Finance

The IIF report on regulatory interactions focuses mainly on Basel III and Solvency II, looking into how various types of assets are dealt with under the different regimes. For example, European insurers have a higher incentive to hold short-dated, lower-quality bonds than do the banks or US insurers. European insurers therefore have an incentive to shorten the maturity of their asset holdings. Since the capital charges on the holding of corporate bonds also apply to bonds issued by banks, insurers are discouraged from holding bank paper. Insurers subject to Solvency II and European banks are strongly incentivised to hold EEA debt, with this being reinforced for the banks by the Basel III liquidity regime. In the residential mortgages area, European insurers have an incentive to hold relatively low LTV loans with little regard for credit rating. By contrast, banks reap relative capital advantages from holding higher-quality, higher LTV loans. There is, in general, no case for seeking extensive harmonisation of insurance and banking regu-lations, but these illustrative results emphasise the need for policy makers to coordinate the development of regulation.

The agenda for banking regulation could compel banks globally to raise up to USD 1.3 trillion of high-quality capital and USD 0.5 trillion of long-term debt issuance by 2015. But a regulatory regime militating against insurers’ holdings of corporate debt, including issues of bank paper, will make it harder for the banks to raise the funding they need. This would lead banks to de-lever and reduce the size of their balance sheets, which would have implications for credit growth, GDP growth and employment.

Comparing the banks and insurers with regard to systemic risk, it is recognised that in-surers may undertake non-traditional/non-insurance activities which can have signifi-cant implications for firms’ risk profiles and, in some cases, be a source of systemic risk. There is no case for applying a blanket solution, such as a solvency surcharge, to large parts of the insurance industry. Rather, these activities need to be identified and regu-lated appropriately according to the risks they pose.

Overall conclusions: Enhanced supervision is critical for both sectors. There has to be a good dialogue

between supervisors and firms. There is no case for a separate supervision model directed at “systemic” companies,

but a model of supervision which becomes more intensive as risk increases would be appropriate.

Supervision should leverage on industry sound practice.

Scan the QR code with your smart phone and watch the video: “Implications of cross-sectoral industry reforms” with Paul Wright, Senior Director IIF

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“The accounting regime should reflect the nature of the business and encourage management of risks associated with the business model.”

Terri Vaughan

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The influence of changing accounting standards on the performance of the insurance sector

Terri Vaughan, CEO, National Association of Insurance Commissioners

Arguments for and against fair value accounting include the following:

Proponents argue: Fair values reflect current market conditions (also timely information, potentially

increased transparency, relevance); They encourage prompt action; They are consistent with the existence of more robust markets for moving risk around

at market prices.

Opponents argue: Fair value accounting will artificially increase volatility in earnings and capital; They exacerbate procyclicality; Fair values do not reflect the long-term business model of insurance; They are not reliable or comparable.

According to some proponents of efficient markets theory, prices reflect fundamental values and are thus a better indicator of value than any accounting measures. Recent evidence around efficient markets raises questions about whether prices necessarily reflect fundamental values. If so, accounting provides an important independent source of value and should reflect the business model. For example, if the business model is long term, then fair value may not provide the right answer.

Concentrating on accounting in life insurance, Dr Vaughan compared what happened in the Great Depression with experience during the recent financial crisis, drawing the following conclusions: Market values can differ from fundamental values. Life insurance and other forms of insurance with a medium-to-long-term horizon

demonstrate stability, mainly because they do not have to react to short-term volatility. The accounting system matters. Company behaviour responds to accounting. The accounting regime should reflect the nature of the business and encourage

management of risks associated with the business model. Market values are a point of interest and should be disclosed, but should not neces-

sarily be the primary basis of measurement for a long-term business model. In general purpose accounting, Other Comprehensive Income (OCI) can be a useful

way to distinguish between earnings that reflect the fundamental business model and those that are potentially transitory. The key is providing relevant information to the users.

For regulators, the issue is the ability of the firm to meet its obligations over the long-term. Objectives of general-purpose accounting and regulatory accounting may differ.

In general, we need to think through the implications, the unintended consequences, and how the market and companies will respond.

Scan the QR code with your smart phone and watch the video: “Implications of accounting on the insurance industry” with Terri Vaughan, CEO, NAIC

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Panel discussion

Solvency development and modernisation — a global perspective

Moderator:Thierry Léger, Head Division Globals, Swiss Re

Panellists:Julian Adams, Director of Insurance, Financial Services Authority Rob Curtis, Director of Insurance Risk, KPMGJean-Christophe Menioux, Chief Risk Officer, AXAJo Oechslin, Chief Risk Officer, Munich ReTerri Vaughan, Chief Executive Officer, National Association of Insurance Commissioners

Terri Vaughan explained that the NAIC modernisation initiative is proceeding via incre-mental improvements in capital, governance and enterprise risk management, group supervision, accounting and valuation, and reinsurance. She outlined progress in inter-state coordination and resource sharing, facilitated by the lead group regulators.

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Regarding implementation of Solvency II, Julian Adams sees challenges in three main areas: 1. Policy The lack of a finished text means that assessing for compliance is like aiming at a

moving target.

2. Logistics There are skills shortages, for example in the actuarial and project management

fields. Coordination with other European supervisors entails some difficulties, though

the enhanced college arrangements seem to be working well. A heavy model assessment workload.

3. The present volatile and uncertain context Adams pointed out, however, that policy clarity would soon be achieved. The Solvency II text as is enables planning for implementation despite the difficulties. He said it can be hard to respond to requests from industry because different companies want differ-ent, sometimes contradictory things. Industry could help regulators by being clearer: it is sometimes difficult to disentangle lobbying from real must-haves.

For Rob Curtis, the debate on sifis (systemically important financial institutions) has not been well articulated. Supervisors understand that insurers want to be clearly distin-guished from banks, but the FSB still has to obtain the relevant information.

On whether Solvency II is a threat, Jo Oechslin thinks it is not easy to replace a non-risk-based regime with a risk–based one during the worst economic crisis in a century. It is problematic that the new rules introduce layers of confidence over existing layers of confidence. But in general, the insurance industry supports the Solvency II measures, subject to the resolution of the long-term issues.

Jean-Christophe Menioux acknowledges the need for convergent regulatory regimes, but he too thinks the rules should not add an unnecessary layer of supervision. Regula-tion should be principle-based rather than prescriptive, and should be applied widely enough to ensure a level playing field.

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Session 4: Challenges along the path to future growth

Staying on course




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Breakout sessions

Implications of the systemic risk debate Nick Kitching, Head of Regulatory Policy Oversight, Aviva

The implications of the systemic risk debate for insurers are changing. The G20 Cannes Summit resulted in the first list of Globally Systemic Important Banks (29 banks from 12 countries) and the Financial Stability Board has started to review the consistent implementation by countries of measures applying to these institutions (increased loss absorbency requirements, resolution regimes and intrusive supervision).

The IAIS paper ‘Insurance and Financial Stability’ (published in November 2011) focuses on the business model of insurance and the role that insurance plays in the financial system. It confirms many of the points made by the Geneva Association in the Systemic Risk and Insurance paper of March 2010, particularly that core/traditional insurance is not a source of systemic risk.

The business model of insurance (funded by up-front premiums, not subject to potential immediate cash calls and closely matched assets and liabilities) means that the criteria defining systemic risk do not apply to core insurance business. Additionally, the regula-tory framework for insurance contributes to stability through its focus on policyholder protection and rules/principles that ensure orderly market failures through use of ladders of supervisory intervention and technical provisions.

The Geneva Association has proposed that the focus must be on activities, particularly, potentially systemically risky activities. Any potential systemically risky activities should be identified and then assessed based on the level of activity that would be considered critical, taking potential mitigating and aggravating factors into consideration. The IAIS are currently determining indicators for identifying Global Systemically Important Insur-ers (G-SIIs) and are considering policy measures for G-SIIs. IAIS are expected to consult publically on this in March 2012.

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Own Risk and Solvency Assessment (ORSA) Jean-Christophe Menioux, Chief Risk Officer, AXA

The CRO Forum has investigated ORSA reporting requirements to determine the target audience, the purpose and use of the report, the levels within a group at which it should be produced, and the content.

The analysis concluded that the principal target audience is the Board of Directors. Although required by Solvency II, the report is therefore mainly for internal purposes, rather than solely for regulation, and its emphasis should reflect that. In addition to the regulatory function, the report supports business, capital and risk management plan-ning. A single report would be needed at Group level.

The overall conclusion is that ORSA is a management tool that helps to strengthen the culture of risk management. In the context of the business strategy, it provides a holistic view of short- and long-term risks in relation to current and future capital and solvency needs. ORSA represents good practice ahead of formal regulatory requirements. Out-side Europe, the IAIS and NAIC (USA) are working on ORSA requirements similar to those in Solvency II.

Scan the QR code with your smart phone and watch the video: “Handling global solvency with care” with Jean-Christophe Menioux, CRO AXA

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Reputational risk in insurance — why non-technical risk matters Britta Rendlen, Head of Sustainability Risk Management, Swiss Re

Public scrutiny of business conduct has risen sharply over the last two decades: com-panies today are expected to behave responsibly, accept full accountability for their social performance, and demonstrate transparency and consistency with their declared core values. There are many issues that trigger strong ethical reactions from NGOs and sections of the public. Even if a company complies with all applicable laws, it may suffer massive reputational damage if its business practices become the target of a public campaign.

Swiss Re has developed a risk management tool, the “Sustainability Risk Framework” to identify and address sustainability risks in its core business. The framework currently comprises policies on eight sectors and issues: defence industry, oil and gas (including oil sands), mining, dams, animal testing, forestry and logging, nuclear weapons prolifer-ation as well as an overarching human rights and environmental protection policy.

To explain how the framework is operated, Britta Rendlen and Felix Staub from Swiss Re’s Risk Engineering Services gave a practical example that came up when Swiss Re was asked to provide cover for a large-scale oil sands mining project in Canada. The risks of this activity are climate change (GHG emissions), air and water emissions, fresh water use, land use and reclamation concerns, social impact and health risks (in this case mainly among First Nations).

When considering participation in a project which could have negative effects and incur reputational damage for Swiss Re, the company examines the risks in the light of the Sustainability Risk Framework criteria and then decides whether to provide cover or not.

Scan the QR code with your smart phone and watch the video: “Reputational risks and the sustainability framework” with Britta Rendlen, Head of Sustainability Risk Management, Swiss Re

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Impressions

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About the event

The conference is organised by The Geneva Association in collaboration with major insurance and reinsurance companies each year. In 2011, it was held in partnership with Swiss Re. The goal of the event is to promote an understanding of modern risk management in insurance and the role of the CRO. This is achieved through a series of workshops, studies and initiatives in the area.

The event provides not only opportunities to share experiences and to get to know colleagues with similar responsibilities in other prominent insurance companies; it also allows for a constructive confrontation with strategic issues facing the insurance industry and direct contact with a global network of leading experts.

The idea of this venture is to branch out to other groups (beyond insurance, e.g. banks and other firms) previously not present in other networks. One of the objectives of the CRO Assembly is to spread and discuss the knowledge gained in other sectors and help the cross-fertilization of ideas and concepts.

The first CRO Assembly was held in November 2005 at the Swiss Re Centre for Global Dialogue and since then it has been hosted each year alternatively by Swiss Re and Munich Re.

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Organisers

The Geneva AssociationThe Geneva Association is a unique think tank for the international industry whose membership comprises a statutory maximum of 90 Chief Executive Officers (CEOs) from the most important insurance companies in the world. Its main goal is to research the growing importance of worldwide insurance activities in all sectors of the economy. It tries to identify fundamental trends and strategic issues where insurance plays a substantial role or which influence the insurance sector. In parallel, it develops and encourages various initiatives concerning the evolution – in economic and cultural terms – of risk management and the notion of uncertainty in the modern economy.

CRO ForumThe CRO Forum is comprised of the Chief Risk Officers of the major European insurancecompanies and financial conglomerates. It was formed in 2004 to work on key relevantrisk issues for advanced practitioners. The CRO Forum is a professional risk management group focused on developing and promoting industry best practices in risk management. It intends to present large company views, with three core aims: Alignment of regulatory requirements with sophisticated/best practice

risk management Acknowledgement of group synergies, especially diversification benefits Simplification of regulatory interaction

Swiss ReSwiss Reinsurance Company Ltd is a leading and highly diversified global reinsurer and part of the Swiss Re group of companies. The company operates through offices in more than 20 countries. Founded in Zurich, Switzerland, in 1863, Swiss Re offers financial services products that enable risk-taking essential to enterprise and progress. The company’s traditional reinsurance products and related services for property and casualty, as well as the life and health business are complemented by insurance-based corporate finance solutions and supplementary services for comprehensive risk man-agement. Swiss Reinsurance Company Ltd is rated “AA-“ by Standard & Poor’s, “A1” by Moody’s and “A+” by A.M. Best.

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© 2012 Swiss Reinsurance Company Ltd

Publisher: Swiss Re Centre for Global Dialogue

Author: Jeffrey Barnes

Editor: Brian Rogers

Photography: David Ausserhofer

Unless clearly stated as a view of the Swiss Reinsur-ance Company Ltd, the comments and conclusions made in this report are those of the authors and are for information purposes only. Swiss Reinsurance Company Ltd, as editor, does not guarantee the ac-curacy and completeness of the content provided. All liability for the accuracy and completeness of or any break of confidentiality undertakings by this pub-lication or for any damage resulting from the use of the information contained herein is expressly exclud-ed. Under no circumstances shall Swiss Reinsurance Company Ltd, the author or the editor or any of its entities be liable for any financial or consequential loss relating to this publication.

[email protected]

www.swissre.com/cgd

Swiss Reinsurance Company Ltd Mythenquai 50/60 P.O. Box 8022 Zurich Switzerland

Telephone +41 43 285 2121 Fax +41 43 285 2999 www.swissre.com

© 2012 Swiss Re. All rights reserved.

02/12, xxx en

Documents

7th CRO Assembly Conference Report